Rule of Thumb: How Much Should You Spend on Rent?
Conventional wisdom says 30% of your income should go to rent
When renting an apartment or house, it's important to determine how much you should spend on rent to keep your budget manageable. The 30% rule is one guideline for determining what you should pay.
This rule of thumb for rent dictates spending no more than 30% of your income on housing each month. The reasoning behind it is that by capping your rent payment at 30% of your monthly income, you'll still have plenty of money left to cover other living expenses and to work toward your financial goals.
But how does that translate to dollar amounts spent on rent? Here's more on how the 30% rule of thumb for rent works and how to apply it to your budget.
- The 30% rule of thumb for rent recommends spending no more than about one-third of your monthly income on a rent payment each month.
- National housing guidelines have contributed to the 30% rule's use as a standard of rental housing affordability.
- The number of people in the U.S. who spend 50% or more of their income on housing has increased over time.
- One alternative to the 30% rule for rent is the 50/30/20 rule of thumb for budgeting.
Where Does the 30% Rule for Rent Come From?
The 30% rule of thumb for rent traces its roots to the 1930s, specifically the National Housing Act of 1937. This act created the public housing program for low-income families and established guidelines for maximum rents for them.
Over the years, the original maximum rent threshold gradually increased from 20% of income to 25%, then to 30% in 1981. This amount remains the standard for most public housing programs and is generally used as the yardstick to determine how much you should spend on rent at most income levels.
Interestingly, the 30% rule applies to rent, but there's a different number that's used for mortgage payments. Mortgage lenders typically look for borrowers whose combined monthly housing and debt payments don't exceed 43% of their income.
The 30% rule is rent-specific and doesn't include other necessary housing costs, such as utilities or renter's insurance.
How Does the Rent Rule of Thumb Work?
In simple terms, the 30% rule recommends that your monthly rent payment not be more than 30% of your gross monthly income. To calculate how much you should spend on rent, you'd simply multiply your gross income by 30%. For example, if your gross monthly income is $5,000, the maximum you should be paying for rent is $1,500 (30% of 5,000 is 1,500).
That would leave 70% of your gross monthly income to cover other necessities, such as utilities and food, discretionary spending, debt repayment, and savings. Again, this idea can be traced to the standards of rental affordability set by national housing guidelines.
Grain of Salt
There are two major flaws associated with the 30% rule of thumb when deciding what percentage of income to spend on rent. First, it doesn't account for inflation, income stagnation, or rising rent prices.
The median household income for U.S. renters was $42,500 in 2019, according to the most recent data calculated by the Center on Budget and Policy Priorities, a nonpartisan research and policy institute. However, the median U.S. rent for a two-bedroom apartment was up to $1,514 as of February 2021, according to data from apartment rentals website Zumper. If you were to apply the 30% rule, renters in that income range should be spending no more than $1,062.50 on rent each month.
The other weakness with the 30% rule for rent arises from the fact that it's not personalized to your situation. It doesn't take into account, for example, how much student loan or credit card debt you might be paying off. Nor does it consider how much money you're earning, what you pay in taxes, your financial goals, or the affordability of the real estate market where you are planning to rent.
For instance, the typical monthly student loan payment in 2019 was between $200 and $299, according to data from the Federal Reserve. The average starting salary for a college graduate in 2019 was $53,889. In this case, using the 30% rule for rent, you’d allocate $1,347 a month for rent. Subtract $299 for your monthly student loan payment, and you're left with about $2,844 per month. That may seem like a lot, but again, that's based on gross income, which is before taxes are taken out of your paychecks.
If you were single with a salary of $53,889 in 2021, you’d be in the 22% tax bracket. That makes your take-home pay about $44,848, or about $3,737 per month (before state taxes or other deductions). If you do the math again, subtracting 30% for rent and $299 for student loans from this net monthly income, you're now left with about $2,317. That's more than a $500 difference from what you had based on your gross monthly income. And when you factor in transportation, health care, insurance, food, clothing, and utilities, that remaining money can disappear quickly.
Conversely, let’s say you were a high-income-earner making $250,000 a year. In that scenario, after accounting for federal income taxes, the 30% rule would say you could spend about $4,485 a month, or $53,830 a year, on rent. You certainly could do that, but if you're trying to save as much money as possible so you can, say, retire early, you may want to spend much less on rent.
Basing your budget on net income rather than gross income can help avoid spending more than you realistically can afford on rent.
Rent Rule of Thumb vs. The 50/30/20 Rule
The 30% rule of thumb for rent isn't the only way to approach budgeting for your rent. You may consider an alternative, like the 50/30/20 rule instead.
The 50/30/20 rule for budgeting is fairly straightforward. With this method, you spend:
- 50% of income on necessities, or “needs”
- 30% of income on "wants"
- 20% of income on savings and debt repayment
This rule won't tell you exactly how much you should spend on rent each month. But it can help you determine guidelines for how much of your income to allocate toward essentials versus discretionary spending. For example, if you take home $4,000 a month, then no more than 50% of that, or $2,000, should go toward housing, utilities, and other essential expenses. You could then spend 30%, or $1,200, freely on your wants, and then 20%, or $800, could go toward saving or paying down debt.
Whether it makes sense to use the 30% rule or the 50/30/20 rule for budgeting for rent comes down to your financial situation. If you don't have any debt, for instance, then you may be able to afford more than 30% of your monthly income on rent. Or if you live in a housing market where rent prices are high, paying more could simply be mandatory.
On the other hand, you may be angling to spend the least amount possible on rent each month so you can pay off debt or grow your savings. Doing the math for your situation using both the 30% rule and the 50/30/20 budgeting rule can help you compare options for spending on housing so that you maximize opportunities to save.
A budgeting app may be useful for tracking your monthly income and expenses so you can see where your money is going and which budgeting method is right for you.